Putting Big Bills On Credit Cards

For the first time ever (that’s over 2 decades, mind you), we actually received a pretty hefty tax refund in the previous year. This is in contrast to the significant amounts we used to owe the government during tax time because we didn’t withhold enough. It’s quite a change to having those tax bills loom large, very suddenly.

If you’re instead finding yourself at the other side of the IRS, feeling nervous about paying off what you owe, then you may be wondering whether your credit cards can show you the way out. Many people find themselves in this predicament, unfortunately. Why? Because a lot of people designate their credit cards as their source of emergency cash and will tap them when in a financial bind. But I can foresee trouble if one isn’t careful with this setup. Let’s consider the pros and cons of paying big expenses with credit cards.

When you use your card to make large expense payments, such as towards your mortgage or tax debt, you’re simply transforming your debt from one kind to another. You’re merely juggling your debt and probably incurring additional charges in the process. If your cards penalize you with higher interest rates, then you’re going to be in the hook for even more money (this time, to your card company) — especially if you maintain a balance. The only time I’d encourage the use of cards for paying down other types of debt is if you never carry a balance and know how to use rewards cards wisely.

The Pros: Using Rewards Cards To Pay Big Expenses

If you have a rewards credit card geared towards giving points or miles for each dollar you spend, then you have the potential to reap lots of benefits. Certain credit cards may even make paying your mortgage a reward by adding the cash back you earn to your balance. It’s possible that such a program could help you pay off your mortgage a bit early. But this, of course, depends on the availability of such cards (which support mortgage payments) or of a payment service that allows the use of cards in this manner (more on this later).

However, if you aren’t the type to use your rewards card too often, this won’t be much of a benefit. And if you need to take on a hefty annual fee to gain such a rewards card, it might not pay for itself each year. To make the most of a rewards card and high dollar bills, you need to use reward programs that don’t limit how many points or miles you can earn in a year. You want to double check that your points won’t expire after a certain amount of time, too.

If you are going down this path, do so carefully. Here are some tips for leveraging the use of your cards:

The Cons: Using Plastic To Pay Bills? Beware of Card Abuse

Now let’s get down to the risks and negatives of using cards this way. Back in May, the New York Times checked into ChargeSmart.com. This service allows people to use their credit card accounts to pay bills that don’t typically accept credit cards. The downside to using a service like this is that you may end up paying quite a bit in fees.

Service fees aren’t the only risk of diverting your major bills to a credit card. If you aren’t diligent about paying off the credit card’s balance each month, you might accrue interest. Worse, if you forget that a major bill is on automatic payment, you may face the hazard of going over your credit limit. This can cascade into transaction fees, late fees and hikes in your APR. Also, you should use a credit card that doesn’t have onerous annual fees or a high APR. A $50 bonus rewards check isn’t worth it if you are paying 20% interest for months on end.

Paying Large Bills With Credit Cards: A Hypothetical Scenario

Here’s an example of why most people shouldn’t be using their cards to pay off big debt. Let’s go over the circumstances where it doesn’t benefit you to move your mortgage payment onto a credit card. Let’s take a look at Jane, who has a monthly mortgage payment of $1,500 and a credit card with a 15.42% interest rate and a balance of $7,000. Thanks to the recent low rates for home loans, Jane refinanced so she’s only paying 4.18% interest on her mortgage. If she can’t pay off her credit card each month, in effect she’ll be increasing her mortgage rate up to 15.42% and will lose money.

And as mentioned, by moving the mortgage payment to a credit card, she’s actually moving secured debt to unsecured debt. That’s considered a disadvantage by many financial experts. Jane’s situation can become worse if she misses a few credit card payments. The credit card company is likely to increase her interest rate to 29.99%, which would be a hardship for many of us. A house with 29.99% interest would be close to unaffordable for anyone.

Then there’s Jane’s tax payment. Back in April, she assumed her credit card payment went through when she filed using her favorite tax software. Alas, it turns out that the IRS did not receive her payment. Now Jane is on the hook for the original tax obligation, plus penalties and interest. But instead of trying to pay with her credit card again, perhaps she could consider other alternatives. Let’s look at the universe of possibilities (both good and bad):

An IRS Payment Plan: The IRS will allow you to make monthly payments if you can’t pay off the amount you owe right away. Pay within 120 days or you’ll face penalties. By setting up an installment agreement or payment plan with the IRS, you may still end up paying penalties and interest, but that’s something you’ll need to confirm. More information here.

Tap Your Savings or Cash in a CD: You’ll lose the interest, but avoid the tax penalty.

A Bank Loan: You might qualify for a line of credit at your bank or credit union.

A Personal Loan: Ask someone you know if they’ll lend you the amount, and offer to pay interest on it. It’s less risky, but you’ll put your relationship on the line if you can’t repay as agreed. Check out our piece on how to get a personal loan, for more ideas.

A Payday Loan or Cash Advance? This is an unpopular option and probably worse than using your credit card. Consider it a less than optimal solution, seeing how the interest rates can be pretty high. It can be terribly risky if you fail to repay in a timely manner.

Any conclusions? I believe that with the right set of plastic and careful monitoring, it’s possible to pay taxes or a mortgage with credit cards. However, you stand to lose a lot of money in late fees and interest payments if just one thing goes wrong. The best solution is to be as prepared as you can for these big bills. Save way ahead of time for your high priority expenses. Barring that, negotiate with your lender or the IRS for a more reasonable payment plan.

I love the balanced message you’re sharing and appreciate the pros and cons of using credit cards this way… as things are in a down turn, you are providing some ideas and your increased diligence through this time shall position you for even greater success in the future.

Re tax withholdings: Sometimes, you have to step away from the mechanics of withholdings etc and simply celebrate the positives of the moment. I think that mentality is really what sustains us over the long term.

Thanks for sharing….

Dave

The Personal Finance PlaybookApril 10, 2009 at 6:21 am

The last year, we got a few hundred bucks worth of a tax refund (so we don’t have to worry about tax payments). Sure that money could have been earning interest, but it would have been a trivial amount. If I made more money and had more coming back (my father in law got 55k) I might worry about the interest. In my situation, I’m personally just glad I didn’t have to pay them this year. I also must made a mistake on my taxes, because the IRS actually sent me a letter saying I got more than I thought I was getting back. I’ve never knew they changed errors in your favor. It was refreshing, and it made me happy.

FoobaristaApril 10, 2009 at 11:44 am

We always target our withholding to hit the “safe harbor” for the previous year, and have a special “tax” savings account where we put some of my wife’s self-employment income. The amount in the tax account isn’t entered into our net-worth spreadsheet.

When we do our taxes – and we usually owe – we pay the taxes due out of that account, and the rest is our “refund” as it’s put into our general savings account for investment, etc – and then shows up in the net worth.

Greener PasturesApril 10, 2009 at 2:44 pm

It’s great when you end up receiving more money from the tax guy than you thought would be coming back. Last year, deductions worked against me. I had sold some stock and had a higher income than anticipated. I had to pay up big time when taxes were due. Ouch.

QuatinnSeptember 14, 2009 at 1:59 pm

I usually rely on my employers to do my taxes right so I almost always get a refund. I don’t have to worry about paying taxes with loans or credit cards.

BrianAugust 19, 2011 at 10:31 pm

It is now 1 year later. Just curious, how did the 2010 tax year work out for you?

TedSeptember 21, 2011 at 11:47 am

How are you able to charge mortgage expenses to a Rewards card? I haven’t seen how this is possible— for responsible and planned use, this can be a huge plus. For me, it could be a ‘free’ additional $500 a year.

@Ted,
There used to be certain credit cards that were geared towards mortgage payments, such as the Citi Home Rebate Platinum Select Mastercard, but that seems to be discontinued (perhaps due to past issues with the real estate and credit crisis). However, there are new services such as CardIt and ChargeSmart.com that allow you to make payments on almost anything with your credit card. There are small fees involved but depending on your set up, you may come out ahead via rewards you earn. This is, of course, something you’ll have to calculate and determine on your own.

Also, I checked the CardIt service and it’s not loading at the moment.

krantcentsSeptember 21, 2011 at 6:28 pm

I just paid my annual homeowners insurance by using my credit card. I have an airline credit card and accumulate frequent flier miles. I use them to travel overseas generally business or first class. I pay my entire balance every month.

Funny about MoneySeptember 22, 2011 at 5:32 am

This is a nice reminder. I self-escrow cash from month to month to pay big annual bills such as homeowner’s insurance. Because it’s sitting in the special account for that purpose, when the bill comes, I don’t think of charging it to my rewards card. Next time the car and homeowner’s premiums come due, I’ll ask if the bills can be charged to my AMEX kickback card.